According to a report by the Consumer Financial Protection Bureau one in 10 adults or about 26 million consumers are “credit invisible.” These consumers have no credit history with any of the three credit bureaus. This is in addition to the 19 million Americans that have insufficient information that cannot be scored on their credit reports.
Without credit reporting and credit scoring, it is a challenge for financial service providers to grant credit. The type of credit available to Americans with little or no credit is often more expensive with less favorable terms.
This may not be a problem for some people who use cash only but for others it is a huge issue. Credit reports and scores can determine the terms of people’s mortgages, whether they qualify for auto loans, or if they are eligible for different credit cards.
Potential employers may review a consumer’s credit report as a factor in making a hiring decision. Landlords often consider credit history before deciding whether to approve a potential renter or how much money to require for a security deposit.
The impact on the lives of Americans without a solid credit history or no credit history can be profound. It can preclude them from accessing credit and taking advantage of certain opportunities. A good credit history can be build without incurring debt.
How to build a solid credit history with or without credit cards:
Get alternative credit accounts reporting
If you pay a recurring bill on a month-to-month basis such as utilities, cable or satellite, cell phone or rent ask the provider to report your payment activity to the credit bureaus. But only request this if you have an on-time payment history.
Rentreporters will report your monthly rental payments for a fee. You complete a rent verification process, they report your rent payment history to Transunion. It will appear on your credit report, as “RR/Residence.” Each month thereafter Rentreporters will contact your landlord to verify the prior month’s rent payment and update your credit report. The cost to set-up is $94.95 plus $9.95 per month thereafter. The key point is you have to get your landlord to agree.
Payment history accounts for 35% of your credit scores and can have a significant impact if there is not a lot of other data in your credit reports. Keep in mind these companies are not obligated to report to the bureaus but ask anyway if your payment history is on-time.
Apply for an online personal loan
Personal loans can build a solid credit history because they have the potential to show creditors that you are a responsible borrower. Getting a loan can be challenging if you have little credit unless you find a lender that makes loans for less than perfect credit.
Companies like NetCredit offer loans to people with bad credit. The interest rates are rather high, up to 36% with a minimum credit score requirement of 550. Of course the lowest rates are typically given to people with good credit but even with the highest rate of 36% borrowers will fare better than using payday lenders.
According to the Center for Responsible Lending the typical two-week payday loan has an average rate ranging from 391% to 521%. Applying to NetCredit will not impact your credit score, it is a soft inquiry to Transunion.
Get a credit builder loan
Another alternative is to take out a secured loan with a credit union or bank. Most credit unions will open a secured loan with as little as a $500 deposit. The loan will report to the credit bureaus monthly just as an unsecured loan. But if you lack the money to put upfront for a deposit ask your credit union if they offer a “Credit Builder Loan.”
Anyone should be able to qualify for a credit builder loan because the credit union does not actually give the borrower any money upfront. The borrower pays a monthly payment on the loan then at the end of the loan term, the borrower is given the money. Meanwhile, loan payments have been reported to the major credit bureaus thus helping the borrower build credit.
Self-Lender is another type of credit builder loan where you don’t need money upfront. Loan amounts range from $500 up to $2100. Monthly payments as low as $47 go towards a FDIC-Insured Certificate of Deposit (CD). At the end of the loan term (12 or 24 months), you get the money that has been paid toward the CD, with interest. Check out Self-Lender, it’s easy to get approved plus payments are reported to the three major credit bureaus.
Use secured or unsecured cards to build credit
One of the quickest ways to build credit is use secured or unsecured credit cards. As you use credit cards, making small purchases and paying your bill on time each month or in full you are building credit because the credit card company will report your account and payment status to the three major credit bureaus.
Within a few months you are on your way to building up a positive credit history without incurring debt. Check with your bank or credit union for unsecured or secured credit card products.
Here are several easy to get unsecured and secured cards.
Just remember with credit cards the amount you owe is very important to your credit score. Credit utilization accounts for 30% of your credit score. The best way to use credit cards to build a solid credit history is to make small purchases like gas, groceries or lunch then pay the bill in full. Never allow a balance over 10% of your available credit limit to report to the credit bureaus.
That means if your credit limit is $500 no more than $50 should report to the credit bureaus. This practice will lead to high credit scores over time.
Without a solid credit history Americans that do seek credit can be vulnerable to predatory lenders. If you prefer not to use credit cards to build your credit history, keep the following in mind:
Not having a credit card could hold your credit score back because 10 percent of your credit score is based on the types of accounts you have in your credit files.
Learn more about the 5 factors that make up a credit score.